Tips & advice
Published Date: November 16, 2023
Understanding second homes vs. primary residences
Although you might visit a second home for weeks on end, it’s only a personal residence for part of the year. The rest of the time it may be vacant or rented out to others. By contrast, lenders expect your primary residence to take priority because it’s where you live and sleep. You can also own more than one “second” home; a second home is defined as a property that’s secondary to your primary residence.Can a second home be a primary residence?
In short, no. A second home cannot be a primary residence because their qualifications are in direct conflict with each other. A primary home is where you spend the majority of your time, and a second home is where you spend a lesser portion of it.Luxury second homes
Characteristics of each occupancy type
Primary residence- Owned and occupied at least 2 of the last 5 years
- Where someone lives the majority of the year
- The address listed on your driver’s license and tax documents
- Occupied for some portion of the year
- Usually more than 50 miles from a primary residence
- Can be rented out for less than 180 days
Takeaways
- A primary residence is where you spend almost all of your time —your day-to-day home
- A property cannot be a primary residence and a second home at the same time
- Lenders refer to your occupancy status to determine your financing rates
Frequently asked questions about primary vs second homes
Why does occupancy status matter?
Lenders care about how you’ll use your property because they use that information to determine your financing. It’s easier to qualify for a mortgage loan on a primary residence and they usually have lower interest rates. Lenders view these loans as less risky — after all, wouldn’t buyers be motivated to continue paying for the roof over their head?
Second homes are a different story. They have higher interest rates and tougher qualification requirements because lenders view these properties as investments. It’s critical to be honest about how you’ll be using your home when you apply for your mortgage because misrepresenting your occupancy status can have real consequences: Your lender can demand the full balance of your loan immediately, you’ll pay additional penalties, and you can even face prison time if convicted of bank fraud charges.
How does designating a property as a second home impact its status as a primary residence?
By definition, a primary residence is the dwelling where an individual predominantly resides. Conversely, a second home is typically a supplementary property where one spends limited periods. Due to these distinct categorizations, a second home inherently cannot serve as one's primary residence, as the time allocation and qualifications for each are inherently opposed.
Can a second home become a primary residence?
It is possible to change a property’s occupancy status should you meet all the requirements of a primary residence. An example of this might be if a retired couple decided to downsize by selling their primary residence and moving into their second home. Occupancy type does determine specifics for your financing, so it’s important to reach out to your mortgage lender before making any changes.
What happens if I decide to sell my primary residence or my second home?
The IRS views second homes as investments. Unless you’ve lived in your second home for an extended period of time before the sale (to change occupancy status), you’ll pay long-term capital gains of up to 20% of the property’s value. Selling your primary residence allows capital gains exclusions. Check with your accountant, but you should be able to write off up to $500,000 on your tax return if you’re filing jointly with a spouse.
Does the IRS view a Pacaso as a second home?
Your Pacaso is a single-family residence that you own in part as a member of a property-specific LLC. Along with your co-owners, yougain a second homethat meets the qualifications outlined earlier (some distance away from your primary residence, occupied for some of the year). Unlike most second homes, Pacaso homes are never rented out. You can rest easy knowing that when you’re not staying at your second home, it’s being well-managed.
Can a Pacaso be a primary residence?
Pacaso offers second home co-ownership. Owners are guaranteed to stay at least six weeks out of each calendar year, but no one owner can occupy a Pacaso full-time as a primary residence.
Kayla Moses
Author
- Share this post:
Don't miss out
The best homes sell fast. See the latest listings, inspiring second homes and buying tips.
I give Pacaso permission to contact me & agree to the terms. This site is protected by reCAPTCHA and the Googleprivacy policy,terms of service and mobile terms.
Want to chat? Contact us.
Don't miss out
Our best homes sell fast, get personalized content first.
Sign up, get more
Unlock exclusive features & receive updates
TREC:Consumer Protection Notice, NY SOP
447 Sutter Street STE 405 PMB 250 San Francisco, CA 94108
©2020 Pacaso. All Rights Reserved
My expertise lies in real estate and property ownership, especially in understanding the nuances between primary residences and second homes. Let's dive into the concepts highlighted in the article:
-
Primary Residence vs. Second Homes:
- Definition: A primary residence is where you spend the majority of your time, while a second home is a property used for a portion of the year but not as your day-to-day living space.
- Lender Perspective: Lenders consider these distinctions when evaluating mortgage applications. Primary residences generally have lower interest rates and easier qualification criteria due to lower risk, while second homes are viewed as investments and carry higher rates.
-
Characteristics of Each Occupancy Type:
- Primary Residence: Owned and occupied for at least 2 of the last 5 years, where someone primarily lives. It's the address listed on official documents.
- Secondary Residence: Occupied for a portion of the year, typically more than 50 miles away from the primary residence, and can be rented out for less than 180 days.
-
Implications and Takeaways:
- Lender Consideration: Lenders use occupancy status to determine financing rates. Misrepresenting occupancy can lead to severe consequences, including demands for loan repayment, penalties, and potential legal consequences for fraud.
- Tax Implications: Selling a primary residence may allow for capital gains exclusions, while selling a second home often incurs long-term capital gains taxes.
-
Pacaso Concept:
- Pacaso as a Second Home: Pacaso, a co-ownership model, offers second homes that meet the criteria for occupancy (not rented out, occupied for some part of the year), but they are not used as primary residences. Co-owners are guaranteed a minimum occupancy duration.
-
Conversion of Second Home to Primary Residence:
- Feasibility: It is possible to convert a second home to a primary residence if certain criteria, such as living in the property for an extended period, are met.
-
IRS View on Second Homes:
- Tax Implications: Second homes are generally viewed by the IRS as investments. Selling a second home typically incurs long-term capital gains taxes unless certain occupancy criteria for primary residences are met.
Understanding these distinctions is crucial for individuals navigating property ownership, mortgages, and tax implications. It's essential to accurately represent the occupancy status of a property for financial and legal purposes.
